How to Evaluate Get-Rich-Quick Business Opportunities

Best ways to determine if joining an MLM organization will be a money-making or money-losing career move.

Q.  My sister-in-law is thinking of signing up for a door-to-door cosmetic company. She has to buy $1,000 worth of product to get started. I never heard of this company before. They say she can earn $16,000 a month if she signs up her friends and family members as sales reps. She has two young children and can't afford to lose this money. What do you think?

A.  I'm sure you've seen the interlocking black and white, almost S-shaped Chinese symbol Yin-Yang. It's a distinctive image that represents the ancient Taoist explanation of why things happen. According to Taoist philosophy, nothing is entirely black ("Yin") or white ("Yang.")

What does this have to do with your sister-in-law's decision to join a multi-level-marketing ("MLM") sales rep force? Plenty!

Taoists believe that both the Yin and the Yang elements are present in every situation. So while we would like to believe that a new venture only has upside, we're reminded that risk is present too.

Multi-level-marketing got its name because sales representatives earn commissions not only on their sales efforts but the multi-levels of other reps they recruit to an organization. The reps at the top of the "pyramid" tend to make the most money. These sales structures can be called "network marketing" businesses too.

Since, MLM organizations are quite polished in presenting the upside, this column will present some balance – the Yin – to the MLM party line.

As a starting point, most MLM reps are classed as "independent contractors." This means they have to pay their own transportation and office expenses, health care costs and of course 100% of the social security and Medicare tax bill. (Employed persons pay only half the wage tax bill.) If your sister-in-law took a part-time job selling insurance or other products as an employee, most or all of these costs would be paid for by the employer.

A second issue is certainty of income. Encourage your sister-in-law to keep track of all hours spent organizing parties, delivering merchandize and collecting product payments. After deducting all her expenses and product costs, what is her hourly income? Does it exceed the federal minimum wage?

Not surprising, the dream of big incomes rarely matches sales rep reality. Even publicly-traded MLM's like Avon report high sales rep turnover as a business risk factor in their annual reports. Because people just don't leave jobs where they are making good money too easily, you can imagine there are a lot of people who never experienced the big dollar flow.

Now here's the real dark side of MLM representation. Working for an MLM organization robs enterprising people of perhaps the most lucrative aspect of entrepreneurship. As an MLM distributor, your sister-in-law owns no equity in the business. This is where real money can be made for entrepreneurs.

For prospective MLM reps:

• Any business, MLM or otherwise, that is solely dependent on selling products to family and friends is unlikely to be successful. If you don't like selling to strangers, find another career pursuit.
• Stay away from MLM's that don't provide 100% refunds for unused product.
• Type the name of the MLM into a search engine plus the word "scam." See what former distributors and the Department of Consumer Affairs have to say about an organization before joining.
• Pay attention to minimum purchase requirements. Mary Kay, for example, requires new distributors to pay a startup fee of $100 and then purchase $200 of product every 3 months to maintain distributor status. Avoid organizations that automatically bill credit cards for fixed monthly product shipments.

So what do I think? If your sister can't afford to potentially lose $1,000 plus get little to no financial return on her invested time, then I'd say a 5% e-savings account from an FDIC insured bank is the smarter, more secure way to go.

Take Command Action Step

Encourage your sister to look at advertisements for sales positions across several industries. Compare sales and benefit information. She should try to talk to sales representatives (not managers who receive recruitment bonuses) who have stayed at the sales job for over 5 years. Ask: Why do they stay? What do they earn? Does anyone work from home with flex-time hours? Encourage your sister to employ her best shopping skills. She will uncover better money-earning deals if she takes the time to ask questions and compare. She can do it!

Do you need time-saving tips to help fund and grow your business? Ask Susan How! Write to small business funding expert Susan Schreter at susan@takecommand.org